Bill Miller, whose Legg Mason Value Trust is trailing the Standard & Poor's 500 index for the second year in a row, predicted consumer, financial and other out-of-favour shares will have the greatest gains over the next five years.
"The new leadership will be U.S., large-cap, dollar-based, and grow to encompass what no one wants to own today," Mr. Miller wrote in a letter to shareholders dated Nov. 1 that Baltimore-based Legg Mason Inc. sent Friday by e-mail.
JPMorgan Chase & Co., the third-largest U.S. bank and Mr. Miller's sixth-biggest holding, has fallen to a 17-month low in New York trading. Citigroup Inc., the largest U.S. bank and the fund's No. 15 position, has slumped 36 per cent so far in 2007.
Value Trust has 15 per cent of its assets in finance stocks and 27 per cent in consumer-discretionary shares.
Mr. Miller, 57, shot to prominence after beating the benchmark S&P 500 for a record 15 years, a streak that ended in 2006. His $19.2-billion (U.S.) fund has climbed 0.6 per cent this year, trailing the index by seven percentage points. Investors pulled $9.6-billion from Legg Mason's equity portfolios in the third quarter as funds including Mr. Miller's have lagged behind their peers.
Defaults of U.S. subprime loans have triggered billions of dollars in losses for investment banks including Merrill Lynch & Co. and Citigroup. The Amex Securities Broker/Dealer Index has slumped 10 per cent this year. Retailers such as Sears Holdings Corp., Value Trust's 11th-biggest investment, are being hurt by falling home prices. Sears shares have slumped 23 per cent this year.
"Today fear dominates the pricing of housing stocks, of mortgage-related securities, of financials and of many consumer stocks," Mr. Miller said.
In September, Mr. Miller said he would buy more shares of large U.S. companies because they were cheaper than the rest of the market. In last week's letter to shareholders, he said he would reduce the weightings of many of the fund's top 10 holdings to increase diversity and free up money for new positions he didn't name.
"We will still be quite concentrated compared to the average mutual fund, just less than we have been previously," he said.
Legg Mason Value Trust owned shares of about 45 companies at the end of September, about half the number in a typical U.S. fund, according to data tracked by Morningstar Inc. in Chicago.
Value Trust's top holding is online retailer Amazon.com Inc., whose shares have more than doubled this year. The second-biggest position is power producer AES Corp., down 0.5 per cent.
The fund has been dragged down by housing-related stocks, which Mr. Miller started buying 18 months ago. He put money in mortgage lender Countrywide Financial Corp. and builders Pulte Homes Inc., KB Home and Centex Corp. Countrywide's shares have declined 65 per cent this year. Pulte has dropped 61 per cent, KB Home has tumbled 51 per cent and Centex has fallen 61 per cent.
Mr. Miller wrote in Friday's letter that he values Countrywide's stock at more than $40 a share, compared with its price of $14.78 on New York Stock Exchange composite trading yesterday.
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